29 March 2011 External T.I. 2011-0395041E5 - Municipal Councillors' Automobile Expenses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Explanation of rules pertaining to municipal officers' allowances.

Position: General information provided.

XXXXXXXXXX
									2011-039504
									Linda Compton
									(613) 957-2135
March 29, 2011

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Municipal councillors' allowances.

This is in response to your e-mail of February 7, 2011 inquiring about the taxation of municipal councillors' allowances.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Comments

It may be helpful to understand that for purposes of taxing income from office or employment, we differentiate between a "reimbursement" of an employee's expense and an "allowance" paid to an employee.

In this context, a reimbursement is a payment from an employer to an employee to repay the employee for a specific amount already actually spent by the employee on the employer's business. An accountable advance is an amount given by an employer to an employee for expenses to be incurred by the employee and to be accounted for by the production of vouchers and the return of any amount not so spent. A reimbursement or an accountable advance is generally not income in the hands of the employee receiving it, unless it represents the payment of the employee's personal expenses.

By contrast, for purposes of this discussion, an allowance is:

1) an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost, even though the amount of the allowance may be set through a process of projected or average expenses or costs;
2) usually for a specific purpose; and
3) usable in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or cost.

Paragraph 6(1)(b) of the Income Tax Act (the "Act"), provides that any allowance received by an employee from his or her employer is taxable as employment income. However, paragraph 6(1)(b) goes on to list various exceptions to this general rule. Of the various exceptions provided, the one of specific relevance to your inquiry is that contained subparagraph 6(1)(b)(vii.1) of the Act. Under this exception, where an employer provides a reasonable allowance for motor vehicle expenses incurred for travelling in the performance of the duties of employment, that allowance is not taxable. Further information on what will be considered to be a reasonable motor vehicle allowance may be found in T4130, the Employers' Guide Taxable Benefits.

In this regard, it is important to note that motor vehicle expenses incurred to drive between home and a regular place of employment are considered to be personal in nature. It is reasonable to conclude that a municipal councillor's regular place of employment is the municipal office. The above-noted exception in paragraph 6(1)(b)(vii.1) would therefore not apply to any motor vehicle allowance paid in respect of such a commute. For the same reason, no deduction of the expense is permitted. However, your correspondence refers to being required to attend at various events at various locations which are unlikely to be considered a regular place of employment of a municipal councillor. As such, a reasonable motor vehicle allowance paid in respect of that travel would be non-taxable by virtue of the exception described above. Where no reimbursement or allowance is received, and provided certain conditions are met, a taxpayer may deduct reasonable motor vehicle expenses incurred in performing employment duties. We refer you to Interpretation Bulletin IT-522R, "Vehicle, Travel and Sales Expenses of Employees" for more information about deducting expenses from employment income.

For elected municipal officers, subsection 81(3) of the Act provides a further exception to the general rule that allowances paid in connection with an office or employment are taxable. The CRA's general views regarding municipal officers' allowances are contained in Interpretation Bulletin IT-292, "Taxation of Elected Officers of Incorporated Municipalities, School Boards, Municipal Commissions and Similar Bodies" ("IT-292").

The effect of subsection 81(3) of the Act is to permit officers and members of certain municipal organizations to exclude from their income for a year an amount received as an allowance for expenses connected with carrying out employment duties, provided that the amount does not exceed 50% of their salary or other remuneration. Note that this provision pertains to allowances and not to reimbursements. The types of allowances that are exempted by this provision are those that are otherwise considered to be taxable. This might include an allowance for general expenses such as office supplies or equipment (for which there is no exception in paragraph 6(1)(b) of the Act). It might also include an allowance for personal travel between home and a regular place of employment.

As noted in paragraph 6 of IT-292, where a particular provincial Municipal Act deems a proportion of the total remuneration paid to an elected member of a municipal council to be an allowance for expenses, it is the CRA's policy that the proportion so deemed (up to one third of the total paid) will be accepted as an expense allowance.

In the absence of a deeming provision in the applicable provincial Municipal Act, paragraph 7 of IT-292 confirms that the CRA will consider one third of the total remuneration to be an expense allowance excludable from income pursuant to subsection 81(3) of the Act and two thirds to be taxable salary or other remuneration. This will be the case except where the expense allowance actually paid is less than one third of the total received, in which case this actual amount will be used. Similarly, where no expense allowance is actually paid none will be allowed.

To reiterate, reimbursements (or accountable advances) by an employer of accountable and reasonable expenses incurred by an employee in carrying out employment duties or activities are not taxable. They are not regarded as "allowances" as contemplated in paragraph 6(1)(b) of the Act, nor are they amounts that need be excluded from income by subsection 81(3). Allowances which are non-taxable by virtue of one of the exceptions in paragraph 6(1)(b) of the Act are also not amounts that need be included in the computation of the portion of remuneration exempted by subsection 81(3) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch